To Fix U.S. Budget, Reform Medical Malpractice Law

The sequestration that is about to take effect imposes too much austerity too soon, does so in a nonsensical way, and yet does little to improve the long-term U.S. fiscal picture.

Far more beneficial would be to make sure that the deceleration in health costs we have been enjoying continues. This is why medical-malpractice reform, although far from a panacea, is worth trying.

Most of the costs in the U.S. health-care system are incurred in a small number of expensive cases. The top 25 percent of Medicare beneficiaries ranked by cost, for example, account for 85 percent of total spending. And the expenses in those cases are driven significantly by the recommendations that doctors make to pursue one treatment path and not another.

In making these choices, doctors are influenced by various things, including medical-school training, traditions among their peers, financial incentives (which are distorted by fee- for-service payments) and, yes, the medical-malpractice system. Improving the criteria for what constitutes appropriate care could significantly change doctors’ behavior and also save money, recent research by Michael Frakes of Cornell Law School suggests.

Customary Practices

Most proposals to amend medical-malpractice law would limit liability in cases where doctors are found to be at fault. But they neglect to address the more important issue of how guilt is determined in the first place. The malpractice laws are generally based on “customary practice” — that is, a doctor can be considered guilty of malpractice if he or she fails to follow customary practice. This is a nebulous concept, however, that only pushes doctors to look around and mimic what their peers seem to be doing.

Other doctors, however, vary widely in their practice of medicine. And just because one treatment or diagnostic procedure dominates in a particular situation doesn’t mean it is the most medically effective one.

Many states have, in the past few decades, altered their customary-practice standard to base it on national medical practices rather than local ones. And the change has had a stunning effect, as Frakes’s study shows. Since 1977, he found, the differences in the medical practices he studied between the 16 states and the nation as a whole diminished by 30 percent to 50 percent. And this suggests, as Frakes says, “that standardization in malpractice laws may lead to greater standardization in practices.” What’s more, this can bring down the cost of medicine without making it any less effective, because the more costly procedures are often not the best ones.

Notice that the effect that Frakes found is more noticeable than what other research on malpractice laws has turned up. That’s because most studies have examined only how variations in health practices can be explained by variations in liability limits, and have ignored the crucial role of how the standard of care is defined. A slightly higher or lower liability limit in a given state doesn’t have that much effect because doctors are still influenced by customary practice.

Presumably, then, health-care costs could come down if all states’ malpractice laws protected doctors who followed national standards of practice. Yet the missing piece is to make sure the national standards are based on good medicine rather than tradition. That’s why the Center for American Progress, among others, has proposed providing a safe harbor, under the medical- malpractice laws, for doctors who follow evidence-based guidelines published by medical associations. This makes a lot of sense.

Safe Harbor

An entity such as the National Guideline Clearinghouse or other public-private partnership could determine standards for the qualifying guidelines, and say which professional associations could issue them. As more doctors and health-care centers adopt clinical-decision-support software, it will become easier for them to adhere to such guidelines. Basically, then, a patient would not be allowed to sue for malpractice if the doctor could show that he or she was following a best-practice guideline. Patients would also be able to use the guidelines; a doctor’s failure to follow them, assuming the patient is harmed as a result, would give the patient a basis for suing.

The Frakes study is at least suggestive that such a safe- harbor approach to reforming the malpractice laws would have a big impact on doctors’ behavior. Along with other steps to improve value in health care — including shifting away from fee-for-service payment — that change in behavior could, in turn, do more to improve the U.S.’s fiscal picture than implementing the sequester would.

(Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)